State may need to recover €25m from those who used scheme
The European Commission will this week respond to the Government's admission it breached EU State aid rules in its implementation of the State's main business scheme, the Employment and Incentive Investment Scheme (EIIS).
Up to €25m may have to be recovered from over 600 individuals who wrongly received tax benefits under the scheme.
An apology was issued last week by Finance Minister Paschal Donohoe, who rushed to amend the flaw in the EIIS in the latest Finance Bill. But the episode comes at an awkward time for the Government given its high-profile clash with the Commission over last year's disputed Apple tax ruling.
The European Competition directorate, led by Commissioner Margrethe Vestager, ordered Ireland to recover at least €13bn in unpaid tax from the technology giant - a move the Government and Apple have appealed.
According to tax experts, the EC's response to the error in implementing the EIIS will reveal whether the EU authorities are hardening their stance against Ireland in the wake of the Apple judgement. Sources within the Department of Finance said the Government is hoping the decision to report and swiftly remedy the mistake will remove a complex administrative burden on Revenue at a time when the organisation remains under acute staffing pressure.
Revenue has repeatedly come under fire for its processing of EIIS applications. There are concerns these delays would intensify if the EC insisted on Ireland recovering the monies.
The revelation is also embarrassing to the Government as the error dates back to October 2015, when changes were made to EIIS to comply with European state aid rules.
That overhaul has now proved inadequate. According to an announcement released on Thursday by the Department of Finance, EU rules prohibit tax benefits for individuals who are connected with the companies.
"I am acting decisively to correct the error in the scheme," said Mr Donohoe, who confirmed the scheme is the subject of a review, which is due for completion in the first half of 2018.
However, the department stressed that EIIS, which was preceded by the Business Expansion Scheme, remains open for eligible companies and investors.
The policy is regarded as a key source of funding for SMEs amid a persistent credit crunch afflicting the sector in the wake of the financial crisis.
Last year, 261 companies were the recipients of EIIS investments and some 1,768 investors benefited.
Tens of millions of euro is raised by small companies through the scheme annually.
But tempers are fraying at the backlog in EIIS claims within Revenue, with both Davy and Goodbody - which run multi-million funds targeted at investors in SMEs - voicing complaints about the delays.
According to sources, the latest amendments are likely to funnel more investors, hoping to avail of EIIS benefits, towards corporate advisors.
Cantor Fitzgerald also facilitates private placements for small businesses and it is understood the firm recently succeeded in raising close to €6m for Irish travel tech firm Boxever.
However, tax experts pointed out that many small enterprises rely on a network of family and friends to inject much-needed capital, an option that will now be eliminated from the EIIS scheme.